Page 338 - CA Final PARAM Digital Book.

• Employees may simply remove goods from the premises.
• Theft of goods may be concealed by writing them off as damaged goods, etc.
• Inventory records may be manipulated by employees who have committed theft so that
book quantities tally with the actual quantities of inventories in hand.

➢ Verification Procedure for Defalcation of inventory- It may be of trading stock, raw materials,
manufacturing stores, tools or of other similar items (readily) capable of conversion into cash. The
loss may be the result of a theft by an employee once or repeatedly over a long period, when the
same have not been detected. Such thefts usually are possible through collusion among a number
of persons. Therefore, for their detection, the entire system of receipts, storage and despatch of
all goods, etc. should be reviewed to localise the weakness in the system.
The determination of factors which have been responsible for the theft and the establishment of
guilt would be difficult in the absence of:
• a system of inventory control, and existence of detailed record of the movement of
inventory, or
• availability of sufficient data from which such a record can be constructed.

The step in such an investigation is to establish the different items of inventory defalcated and
their quantities by checking physically the quantities in inventory held and those shown by the
Inventory Book.
Defalcations of inventory, sometimes, also are committed by the management, by diverting a part
of production and the consequent shortages in production being adjusted by inflating the
wastage in production; similar defalcations of inventories and stores are covered up by inflating
quantities issued for production. For detecting such shortages, the investigating accountant
should take assistance of an engineer. For that he will be more conversant with factors which are
responsible for shortage in production and thus will be able to correctly determine the extent to
which the shortage in production has been inflated.

In this regard, guidance can also be taken from past records showing the extent of wastage in
production in the past. Similarly, he would be able to better judge whether the material issued for
production was excessive and, if so to what extent.

The per hour capacity of the machine and the time that it took to complete one cycle of
production, also would show whether the issues have been larger than those required.

Investigation (Future Maintainable Turnover)- Old Course- (M13E, M16M, PM17, SM17, M18M,
QNO TITANIUM CNO – INTG.080 M19M, SM21, N22E)
639.000
New Course-- (SM23)
H Ltd. is interested in acquiring S Ltd. The valuation of S Ltd. is dependent on future maintainable sales.
As the person entrusted to value S Ltd., what factors would you consider in assessing the future
maintainable sales?
Answer ➢ Factors to be considered in Assessing Future Maintainable Sales:
In assessing the sales which the business would be able to maintain in the future, the following

factors should be taken into account-
(Past)

• Trend: Whether in the past, sales have been increasing consistently or they have been
fluctuating. A proper study of this phenomenon should be made.

(Present)
• Political and economic considerations: Are the policies pursued by the Government likely to
promote the extension of the market for goods to other countries? Whether the sales in the
home market are likely to increase or decrease as a result of various emerging economic
trends?

• Competition: What is the likely effect on the business if other manufacturers enter the same
field or if products which would sell in competition are placed on the market at cheaper price?
Is the demand for competing products increasing? Is the company’s share in the total trade
constant or has it been fluctuating?

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